Atlantic Union Bankshares Corporation (AUB) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares’ Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Bill Cimino, Vice President, Corporate Communications. You may begin your conference.

Thanks, Melissa, and good morning, everyone. I’ve Union President and CEO, Billy Beale; and Executive Vice President and CFO, Rob Gorman with me today. Also joining us for the question-and-answer period are Tony Peay, EVP and Chief Banking Officer; Dave Bilko, EVP and Chief Risk Officer; and Jeff Farrar, EVP of Wealth Management, Insurance and Mortgage. Please note that today's earnings release is available to download on our Investor website, investors.bankatunion.com. Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements on today's call, which are subject to risks and uncertainties. A full discussion of the company's risk factors are included in our SEC filings. At the end of the call, we will take questions from the research analyst community. I’ll now turn the call over to Billy Beale.

Thank you, Bill. Good morning, everyone. Thank you for joining us on the call today. During the second quarter, some 18 months down range from our StellarOne acquisition, our results report, I think, display steady progress towards delivering the strategic growth objectives that will enable Union to deliver top tier financial performance. Total loans for the quarter grew 9.1% annualized and average loans, excuse me, average loans increased 6.5% from the fourth quarter. Our loan growth was broad base that we saw growth in all of our major categories. Our commercial lending team continued to build on momentum from the prior two quarters, as the commercial loan portfolio grew 10.6% on an annualized basis. In addition, our consumer portfolio -- consumer loan portfolio increased 5.2% on an annualized basis during the quarter by -- with increases coming in our mortgage and direct auto and credit card loan portfolios. This broad based diversified growth shows the potential lending power of the Union franchise and our commercial and retail teams are coming together to assert themselves in our marketplace. Keeping pace with loan growth, deposits grew by 8.1% annualized for the quarter, as we continue to grow core households and work to deepen relationships with our existing customers. We are pleased to report that the mortgage company returned to profitability in the quarter, demonstrating the progress the team has made in restructuring its business model and rebuilding the operating platform. We believe we are now positioned to add mortgage loan officers, which should improve our operating leverage and profitability for the mortgage company going forward. Also contributing to a solid quarter for non-interest income growth was our Wealth Management Group, which generated $2.3 million in fee income for the quarter, representing a 4.2% increase over first quarter. Assets under management now totaled $1.8 billion at the end -- at quarter’s end, reflecting an increase of $72 million or 4% growth since year end. Asset quality continued to improve as non-accruing loans are now below $10 million and we saw further reduction in our OREO balances to additional sales of foreclosed properties. During the quarter, we sold $3.6 million in OREO and have approximately $1.8 million currently under contract to be sold as we continue to aggressively work the OREO portfolio down. Since our last call, the Board increased the quarterly dividend to $0.17 a share, up $0.02 or 13.3% from the prior dividend and in line with our 45% to 50% targeted payout ratio. To summarize, I believe we turned in a solid performance in the second quarter as our growth strategy took hold as evidence by the broad-based loan and deposit balance growth during the quarter, the mortgage company returned to profitability and is now ready to start growing again and both -- we believe we are now well-positioned to realize the long-term potential value of our franchise and to generate the earnings growth and top tier financial performance that our shareholders expect. I’ll look forward to answering your questions after the call. But with that, I will turn it over to Rob who’s got lots of numbers to talk with you about.

Well, thank you, Billy, and good morning, everyone. Thanks for joining us this morning. I’d now like to take a few minutes to walk you through the details of our financial results for the quarter. But before I do that, please note that all comparisons of prior year periods are to operating earnings or operating ratios, which exclude after-tax expenses associated with the StellarOne acquisition that were incurred in 2014. For the quarter, earnings for the second quarter were $15.3 million or $0.34 per share, that’s down from $15.7 million or $0.35 per share in the prior quarter. The current quarter results include $832,000 or $0.02 per share in after-tax non-recurring costs related to the closure of seven branches we previously announced in our first quarter earnings conference call. The community banks segment’s results were $15.3 million or $0.34 per share in the second quarter, inclusive of the branch closure costs. While the mortgage segment reported net income of $95,000 in the current quarter. Return on tangible common equity declined to 9.2% from 9.67% in the prior quarter. However, excluding the impact of the branch closure costs incurred during the current quarter, the return on tangible common equity was up to 9.7%. Return on assets was 83 basis points in the second quarter down 3 basis points from the prior quarter. Excluding the impact of the branch closure costs return on assets would have been 87 basis points. The company’s efficiency ratio declined to 67.1% from 68% in the first quarter. Again excluding the impact of the branch closure costs incurred during the current quarter our efficiency ratio would have been 65.6%. Now turning to the major components of the income statement, our cash equivalent net interest income was $66.1 million for the quarter, that’s up $2 million from the prior quarter driven by the impact of the additional day in the second quarter and higher earning asset balances and yields. The current quarters reported net interest margin increased by 2 basis points to 3.97%, compared to 3.95% in the previous quarter. Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the StellarOne acquisition added 11 basis points to the net interest margin in the second quarter and that’s in line with the first quarter’s accretion impact. For your reference, actual remaining estimated net accretion impacts are reflected in the table included in our earnings release. The core net interest margin which does not include the impact of acquisition accounting accretion was 3.86% in the second quarter also an increase of 2 basis points on a linked quarter basis. The core margin increase was driven by higher earning asset yields of 1 basis point in the second quarter and a 1 basis point decline in the cost of funds. The net increase in earning asset yields was primarily driven by higher loan fees, changes in earning -- and changes in earning asset mix, partially offset by lower yields on new and renewed loans. The lower cost of funds in the prior quarter was driven by a more favorable deposit mix as growth in low cost deposits outpaced the net run-off and higher cost CD balances. As noted in our earnings release, we expect that the core net interest margin will continue to decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace the declines in interest bearing liability rates. The provision for loan losses was $1.5 million in the second quarter, that’s an increase of $1.8 million from the first quarter provision level. For the quarter, net charge-offs were $2.2 million or 16 basis points, that’s down approximately $1 million or 8 basis points from the prior quarter. The increase in provision for loan losses in the current quarter compared to the prior quarter was driven by $123 million increase in period -- period end loan balances as well as higher specific reserves required on impaired loans. Noninterest income in the second quarter was $16.2 million, which was up $1.1 million or 7.3% from $15.1 million in the prior quarter. This was primarily driven by seasonally higher overdraft, debit and credit card interchange fees and letter of credit fees as well as increased mortgage revenues -- mortgage loan revenues resulting from improved net gain on sale margins from the mortgage originations this quarter. Our second quarter noninterest expenses came in at $55.2 million, that’s $1.4 million increase from the first quarter. The increase in noninterest expenses almost entirely driven by the previously mentioned $1.3 million in nonrecurring branch closure cost. Excluding these costs, noninterest expense levels increased slightly from the prior quarter as lower compensation expenses were offset by higher marketing, professional fees and OREO related cost. Salaries and benefits expenses declined by $1.9 million from the prior quarter due to lower incentive compensation, group insurance and payroll taxes. Marketing expenses increased $685,000 related to the timing of advertising campaigns while OREO and credit-related cost increased about $780,000 due to seasonal real estate taxes, higher legal fees, losses incurred on the sale of properties, and higher valuation adjustments. As discussed in our first quarter earnings call, we are on track to close seven branches in the third quarter and to realize annual expense savings of $1.9 million on a run rate basis beginning in the fourth quarter. One of the in-store branches has recently been closed and other six branches are scheduled to close on August 3rd. Now, I’d like to take a minute to provide some additional color on the mortgage segment’s financial results for the current quarter. As noted, the company’s mortgage operations continue to make progress towards sustainable profitability, with growth in revenues and achievement of profitability for the quarter, as management continues to implement its restructure and rebuild of this business line. As stated earlier, the company earned $95,000 compared to losses of $267,000 in the first quarter and $602,000 in the second quarter of the prior year. Total revenue for the mortgage company grew to $3.2 million, that's an improvement of 21% compared to the first quarter in 2015. Total production in the second quarter amounted to $140 million with improvement in volume and a more payable purchase versus refinanced production mix as compared to the $138 million in the first quarter of 2015. Gain on sale margins net of commissions amounted to 1.83% in the current quarter, that’s up 12 basis points on a linked-quarter basis and an increase of 28 basis points from the same quarter last year. Mortgage-related operating expenses were essentially flat for the second quarter compared to the first quarter while management’s action have resulted in quarterly operating expense reductions of $1.2 million or 29% on a year-over-year basis. Going forward, continuing mortgage profitability improvement is dependent on increasing loan production levels and maintaining relatively stable net gain on sales margins. As Billy noted, we are now positioned to add mortgage loan officers to improve our operating leverage and increase the profitability at the mortgage company going forward. Now turning to balance sheet. Total assets stood at $7.5 billion at June 30th, an increase of just over $100 million for March 31st. The quarterly increase in assets was primarily driven by loan growth. Loans net of deferred fees were $5.5 billion at quarter end, up $123 million or 9.1% annualized, while average loans increased by $87.5 million or 6.5% annualized from the first quarter. Loan balances are now at 6.2% on a year-to-date basis and have increased 5.3% since June 30th of 2014. We continue to project mid-single-digit loan growth for the balance of 2015 and for the full year of 2015. Also at June 30th, total deposits were $5.8 billion, that's an increase of $114 million or 8.1% from the prior quarter as growth in low-cost deposits outpaced the net runoff in higher cost CDs. Also, as Billy noted asset quality continued to improve during the second quarter. Nonperforming assets totaled $31.7 million at quarter end, comprised of $9.5 million in nonaccruing loans and $22 million in OREO balances. This represents the decline of $11 million or 26% from the prior quarter and $30 million were just under 50% from the prior year. Nonperforming assets as a percentage of total outstanding loans was 58 basis points at June 30th, a decline of 21 basis point from the prior quarter and 60 basis points from the prior year. Our nonaccrual loan balances declined by $7.9 million or 45% in the quarter, which was driven by payments received in settlements, sales of collateral and liquidation of customer assets. Our OREO balances declined by $3.2 million or 13% as a result of property sales closed in the quarter. Our allowance for loan losses increased by $1.4 million from March 31st to now stand at $32.3 million at June 30th, primarily driven by loan growth during the quarter. The allowance as a percentage of total loan -- of the total loan portfolio adjusted for purchase accounting was 1.02% at June 30th, down 1 basis point from the level at March 31st. Nonaccrual loan coverage ratio improved substantially to 340%, that’s up from 178% of March 31st and up from 135% in second quarter 2014. Our tangible common equity to tangible assets ratio at quarter end was 9.3%, that’s down 10 basis points from March 31st levels. Excess capital at quarter end amounts to approximately $90 million with excess being defined as balances above an 8% tangible common equity ratio. We repurchased approximately 78,000 shares for $1.7 million during the quarter. And today we have repurchased approximately $57 million and have about $8 million remaining under our current Board repurchase authorization. Management and the Board of Directors continue to evaluate our capital management options, including dividend payout ratios -- levels, share repurchases and acquisitions as a deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities. So in summary, Union’s second quarter results demonstrate a steady progress toward our strategic growth objective. Of note, loans grew at 9.1% annualized for the quarter and attracting the mid-single-digit growth for the year. Deposits grew at 8.1% annualized for the quarter. The mortgage company returned to profitability and we will close 5% of our current branches by August 3rd as part of our continuing efforts to become more efficient. And finally, we remain steadfastly focused on leveraging the Union franchise to generate sustainable profitable growth and remain committed to delivering top-tier financial performance and building long-term value for our shareholders. With that, I’ll turn it back over to Bill Cimino to open it up for questions from our analysts.

Thanks Rob and we’re now ready for questions.

[Operator Instructions] Your first question comes from the line of Catherine Mealor with KBW. Your line is open.

Hey. Good morning, everyone.

Good morning, Catherine.

Rob, you mentioned loan fees, which will help to keep the loan yield stable this quarter. Can you give us little bit more color on what the impact of loan fees were this quarter versus last quarter?

Yeah. Loan fees were up about $600,000 for the quarter. Some of that related to -- fees related to loan growth. We had some late fee increases. In addition, we had a bit of noise in there related to our interest rate swaps related to derivative accounting. So it added about 4 basis points to the margin for the quarter.

And how are you thinking about loan yields moving forward? Can you give us a little bit of color on pricing on your production and do you feel like loan yields are starting to x all this loan fee north, just loan yields, do you feel like that’s starting to stabilize or do you still feel like we will have in a couple of quarters of compression on the yields?

Yeah. This is Tony Peay. I would tell you that we’ve seen some improvements, I guess in the negotiation of those by other banks. There has been a lot of aggressiveness particularly in markets for us like Richmond, where we’ve got a lot of other banks eyeing a piece of the market. It does seem as though we are getting little better yields this quarter. I wouldn’t suggest for a second that aggressiveness by our competitors is over. But I think I would be cautious in assuming that at this point. But I do think we are seeing some improvement in that area.

Yeah. Catherine. This is Rob again. Quarter-to-quarter, we did see compression in our earning asset yield, primarily in the loan yields of about a basis point. So as you recall, we had suggested the margin was going to compress somewhat quarter-to-quarter. That would have been -- that was the major drive of our original projection.

Got it. Okay. And then a question on mortgage, what level of origination volume do you need to have to maintain profitability in that segment?

Hey, Catherine. It’s Jeff.

Hey Jeff.

How are you? I think $40 million to $45 million in core production is kind of a sweet spot in terms of breakeven profitability. So, we’ve been obviously running pretty close to that level here in the last couple of months, so sustainability of that level will be our challenge as we move forward.

Okay. Helpful. Thank you very much.

Hey. Jeff, if I can, can you talk a little bit about margins because we’ve seen shares of about volume of margin is a big part of that? We’ve seen some pretty nice margins and there might be some compression.

Yeah. Sure. I will be happy to do that. So, yeah, with the refinance wave that we had earlier this year, we certainly saw some strong margins coming through, which you would typically see with the refinance market. We are obviously -- as you look at the mix that we saw in this last quarter, we saw a reversion back from more of a core purchase money origination volume. So, we are anticipating that we could see some gain on sale compression associated with just the normalization of the market away from refinance. So that certainly will be a headwind for us as we move forward and I think the other thing I would mention, we talk about the need to add LOS. I think that given where we are in the cycle right now that is a little bit of a challenge just because a lot of the folks that we are talking to still have pretty strong pipelines. So when you look at it from a cyclical standpoint, not the perfect time to be trying to hire, even those that are not happy or hesitant to move forward right now given how stronger their pipelines in anticipation that they have got money coming to them. So, it’s going to be a little bit of headwind here in the next quarter or two, as we try to ramp up our recruiting efforts. Having said all that, I’m really excited about the number of conversations we are having right now. We are talking to some pretty strong producers. The teams done a good job of working the market, working the street, so we are optimistic that we can add some strong producers and move forward those from the leverage standpoint.

Okay. Helpful. Thanks, guys.

Thanks, Catherine. And I’m also ready for the next question.

Your next question comes from William Wallace with Raymond James. Your line is open.

Thanks. Good morning, guys.

Good morning.

Good morning. How you are doing, Will?

Two, maybe two just follow-ups to piggyback on Catherine’s questions. Tony, to your comments on loans, are you seeing anything or whether it’s in the pipeline or just in the market in general that would give you guys any confidence that maybe that high single-digit loan growth level could be achievable, or do you think the mid single-digit is still the right target for the organization?

Anything is possible. I’m as Jeff is very optimistic about what we’ve been doing in the last few quarters. We have seen strong growth production across all of our lines of our lending loans. We are building teams with people who are doing a good job building their pipeline. So, I think we could do better than the mid single-digits. We are still seeing economic activity pickup. We had loan -- just last week of the quarter payoff. It was probably about $10 million. So, we are still seeing as the accounting picks up, people are doing things they’ve held off doing for a while. We are still seeing some of that loan runoff and we are still finding to keep certain small customers on our balance sheet, not somebody else’s. So, I’m optimistic but I think that are number of things when we are complete with that.

Okay. And along those lines, what regions are you seeing driving the activity in your portfolio from a production standpoint?

I would say, Richmond and Hampton have had slowing growth.

Are they also the markets that are experiencing the most from a payoff perspective?

That’s kind of scattered. It kind of depends upon -- we had a $20 million up in federal reserves. We are looking to see -- we've had good growth in the Hampton market, we’ve got a lot of paydowns, Charlottesville remained strong. Fredericksburg remained strong. Northern Virginia is highly competitive. We would like to see a little more out of the Southwest and we’re working on that. We’ve got our team is in place now and they are settling with building at their pipeline. So it’s fairly well spread out and the payoff is going to come as they come.

I would add that I think one of the stories of this quarter is diversity. We saw growth in commercial and consumer lending. We saw at least across the consumer continuum, we saw growth in really every products but our HELOCs. And the interesting story there is, is that we actually -- the number of new HELOCs that we have booked this year, we’re running at a much faster pace than we have ever gone. But it is not yet translated itself into the higher outstanding, but we’re seeing things there. Across the commercial continuum, we are seeing growth in literally every category so we’re getting good diversity across that. And as far as our regions go, we only had one region that was down for the quarter and Tony has spoken to that because of a sizeable payoff they had. Everybody else was positive flat. And it tends to be the rural regions that tend to find themselves flat or just marginal growth. So we are seeing good diversity everywhere within our footprint, which I think is really part of the story of our franchise. It is the diversity we bring across our footprint, doesn’t necessarily tie us to growth associated with anyone region. We’re getting at across the state and we’re getting at across really all aspects of our lending.

Okay. Thanks. That’s helpful. And my last question is for Jeff. Jeff, you mentioned and it was also in the press release that you guys are looking to may be bulk up on the production side and the mortgage segment. How many hires, production hires can you make with your current without having to increase any of your systems or fixed cost base on that segment? How many people would you like to hire and how many could you hire?

Wally, what I would say is that given what we built in terms of an infrastructure, we have more scalability I think than we had previously, because we have been able to centralize the operation. And we put protocols in place relative to staffing that I think as we evolve will allow us to leverage better. Having said all that, we had modeled another 10 to 15 LOs in the short term, but I don’t think we would need any significant additional resources allocation and that somewhat dependent on sales of systems and who you’re hiring. And so there is a little bit of noise there, but feel pretty confident that we could add 10 to 15 LOs without a significant increase in operating overhead.

Thank, Jeff. I appreciate. I will step out.

Thanks, Wally. And Melissa, we are ready for the next caller please.

Your next question comes from Laurie Hunsicker with Compass.

Hi. Good morning, gentlemen.

Good morning, Laurie.

Just to switch gears over to credit and your credits really have such a nice improvement. Can you talk to us a little bit about such the significant drop in commercial nonaccruals and maybe give us an update too in terms of where we stand on King Carter? I know the golf course was supposed to close this quarter. Was that part of it?

The first part of the question was about the decline in commercial nonaccruals?

Yes. You have the $14.5 million down to $8 million and just a really nice drop there. If you could just maybe update us on where some of these, the royal properties that you had gone back and remarked are?

I think much to my comments earlier about the economy improving, I think we’ve got credits that are getting better, getting well so to speak, certainly anywhere in the development, construction, real estate related businesses has improved. And we did have some payoffs in that regard, nearly $5 million in payoffs of nonaccrual credits that always helps and then we charged off a couple million there, that $2.3 million in charge-offs helped to reduce that balance.

Was most of your charge-offs commercial this quarter?

Yes.

Yes, about 1.8 of that.

And then the other piece you asked about is King Carter, about a year ago we had the letter of intent from a purchaser to purchase the King Carter Golf Course for a $1.2 million. The time came around for the borrower to exercise that. He chose not to exercise that letter of intent that prompted us to go back and basically reassess the value of the property. We obtained the new appraisal and that appraisal came in instead of a $1.2 million came in at something above the $1.2 million came in at $700,000. So we wrote the asset down. The individual investors, the individual and the investors that were looking to purchase the course or still operating the course at this point in time, our cost of out of pocket this year has been negligible so that is certainly an improvement over prior years. And we should have a strategy of either to continue with that individual, whether to sell the course to them at a lower value or to bring in another operator probably by the end of this. We would have it before the end of this quarter, but we will speak to that next earnings call.

Okay. And then the King Carter exposure at March was $5.4 million and that included the golf course, correct?

Yes. King Carter is a multi-use development and what we hold there -- there are it is developed lots and there are hundreds, I won’t say hundreds, there are over hundred houses around the golf course now. We still hold about 85 lots and then there is 20 acres of commercial on the frontage and then another 200 acres of future development. So that package is the whole $5.4 million.

Okay. And then so if you just took $0.5 million write-down on the golf course, you are now down to 4.9 total exposure, or was anything else to mark?

I can tell you exactly.

Okay.

Let me flip the page here. Now we are showing -- we finished the quarter at $5.6 million, we were at $6 million at the end of the first quarter and we’re now down to $5.6 million.

Okay. So I must have that wrong. Okay. Good. And then I mean, in terms of your loan loss provision, and again your credit is still proceed at this point. Can you help us think about how the loan loss provision line should be looking, given your comments in terms of where we are with the mid-single-digit loan growth? In some of the markets, I mean, is it possible that we could see loan loss provisioning be running in the $2 million,$2.5 million per quarter range?

Yes. I think what we really want to look at Laurie is taken a look at charge-offs, we’re running about 16 basis points this quarter, we are 24 in the first quarter. So between 10 and 15 basis points or so in charge-offs. And then you add on top of that the provisioning we have to do for in loan growth that we have. So we’ve been thinking that in the 20 to 25 basis points range and dependent on where charge-offs coming from the provisioning point of view.

Okay. And then I guess along the same lines on the OREO line, that was obviously very elevated at $1.965 million. And I was thinking there was going to come a point when that more normalized to 500,000, 600,000 or so run rate. Can you update us on your thinking with that?

Yes. Laurie, for this quarter, as Billy just mentioned, we took a valuation adjustment, primarily on the King Carter Golf Course about $0.5 million. So hopefully, that won’t recur, but it can be lumpy in terms of those valuation adjustments as we get new appraisals on properties going forward. In addition, we had about $300,000 of seasonal tax, property tax payment that we have to make this quarter. So between them, we’re talking about $700,000 to $800,000 that we would like to think aren’t recurring, but they may be lumpy going forward.

Taxes will be back in December.

Yes. So I see. So we’ve been thinking about the $750,000 to $850,000 range on a quarterly basis kind of normalized.

Okay. And then your second quarter and fourth quarter higher because of the tax?

Yes.

Okay. And then just if you can update us too on your bank properties, your branches so those at June were $3.3 million, that was obviously down a little bit from March at $3.7 million. And now you’ve got potentially seven new branches coming in there. Or are those branches going to be sold? Or how should we be thinking about that line?

We were $3.3 million in former branch sites at quarter end. Six of the seven branches we’re closing are in store, so they are least. So there is no real estate coming in there. There is one brick and motor branch located in the Fredericksburg market that will close and that one is going to add a $900,000 give or take to OREO.

It’s actually about $600,000

$600,000 to OREO.

Once we exit that.

Yes. Once we exited. So that will add $600,000 to OREO assuming we’re not able to sell it and get it under contract before we vacated.

Yeah. And again, we’re actively marketing all of these properties, so we expect excellent progress in reducing those balances even further over the next two quarters.

Okay. And then in terms of, obviously, you took the $1.28 million in branch closures this quarter? Are we going to see any cost run into September quarter or are you went and done there?

We went and done there.

Okay.

Since taking that $1.3 million charge which captures of the costs associated.

Okay. Great. And then just to switch gears. Billy, can you take us sort of from a high level perspective and remind us where you stand on the $10 billion threshold and how you see that? How you’re approaching that now?

Slowly.

That’s good.

Yeah. I -- well it, organically growth wise, if we stay at the mid single-digit loan growth Laurie, it would be year end, oh gosh, 18 or 19, I guess, a 19 before we would hit the $10,000 or $10 billion mark, if we were able to accelerate and end up in the high single-digit organic growth than we would be there at year end to 18. We are building out our risk management area and have already started that, so that piece is ready and prepared to past muster with the regulators as we cross $10 billion. We have provided to the Board and ourselves that we understand the cost related on Durban. We have estimates relative to the [indiscernible] rule and other pieces. Rob and I are having conversations with our counterparts at banks that are already crossed $10 billion and getting a feel from them as what they see the cost are and kind of proving them against their cost against what we’re expecting, so that we have maybe a little bit better feel for it. But I think where we stand now it is more a process and sort of partnership with the Richmond Fed that’s in our quarterly meetings that we’re talking about what to expect from an enterprise risk standpoint, what to expect from IP, what to expect from [BSAANL] [ph]. Had those meetings the -- our leadership of our examination team. This time it’s actually a group that has done banks over $10 billion. So we’re getting -- we are going to get a little better view of what the expectations are in that kind of environment. So it’s -- I would call it a well thought out methodical process.

Okay. And as you think about acquisition then if you were to execute on anything, you would most likely stay small at this point? Is that a good way to think about it like pro forma below $10 billion?

Yeah. I would think that you need to think $1.5 billion down.

Okay. Perfect. Thank you so much.

You welcome. Thanks Laurie. And Melissa, we’re ready for the next caller please.

Your next question comes from David West with Davenport. Your line is open.

Good morning, gentlemen.

Good morning, David.

First, just a couple of detail questions on expenses, the marketing expense you noted did sequentially go up this quarter. Could you talk a little bit about your outlook for the second half of the year on the marketing line?

Yes. The second quarter was up about $600,000 primarily related to production cost and media cost that we incurred. We’re expecting that to comeback down for the balance of the year to about 1.7 or so -- 1.7 million or so a quarter.

Very good. That’s very helpful. And then there is probably kind of relates to Laurie’s earlier question on the regulatory front, professional services that’s an unavoidable thing this day and age. But do you think you are going to pump along the current level or is that likely to trend higher or lower, any comments there?

Yes. I would say it’s probably going to come down a bit but not materially for the balance of this year, that’s how we look at it.

As has that been somewhat inflated by the branch the consolidation study and efforts?

Some of the costs related to that. And there’s other costs that were incurred related to some efficiency work that we’re doing as well and they are back.

Okay. Very good. And then a little bigger picture question where all waiting for the eventual Fed lift off on rates. Could you talk a little bit about your rate sensitivity and if we do get this gradual increase in rates in 2016, what your expectation would be on the margin in that scenario?

Yeah. In terms of interest rate sensitivity, we’re -- our outlook hasn’t changed. We are still slightly asset sensitive looking for more positive impacts as rate rise. And in terms of the margin stabilization, we do expect to see because of earning asset yields coming down as we put new loans on the books have lower rates, as Tony talked a bit about. We do expect earning asset yields compression and we are thinking over the next two to three quarters, we are probably going to see about 3 to 4 basis points of compressions on the margin. And then from there, stabilize assuming rates as you say gradually increase which at this point we are looking at September, December for the -- or December to get lift off from the Fed.

I’m sorry, David. I was trying to ask what does 1% increase in that run rate translate to? Do you recall?

Well, 1% overall increase is about $2.5 million in terms of our net interest income.

Yes.

So we are about 1.7%, a 100 basis points, it’s about 1.7% positive to the margin.

Okay. And then have you guys thought about much what the impact would be, I guess, a lot of people are wondering when we finally start to move to higher rates what the impact on the depositors and on the deposit rates and the deposit flows will be given the unusually long period of negligible rates. You have any particular thoughts on that subject you’d like to share?

Yes. We did a lot of work in modeling as rates rise, what we think the impact would be in terms of deposit surge outflow if you will. And we’ve got a number of contingency plans in place regarding pricing our deposit to make sure that we don’t see a large outflow on deposit levels. That’s going to require obviously increasing rates and we’ve been looking at different betas based on historical times of rate increases, as well as understanding that, probably in an unusual time and surge balances maybe more prone to exiting the deposit base going to other higher yielding if you will assets. So, we’ve done a lot of work on that and we think we are in good position as rates rise. We’ve looked at it from both a gradual increase, as we’ve talked about here or a spike in rates as well and what our contingency plans would be regarding deposit pricing. So, we feel like that we are in good shape from that point of view and we will be able to react quickly.

Very good. Thanks so much.

Thanks Dave. And Melissa, we’ve got time for one more caller, please.

Your last question comes from Blair Brantley with BB&T Capital. Your line is open.

Thanks. Good morning, guys.

Hi, Blair.

Most of my questions have been answered. I did have one on the first accounting adjustment. Looks like its estimates increased from Q1. Can you speak to that? What growth could drive that change for future accretion benefit?

Yes. We’ve done some work up in -- in terms of purchase buy, we have to recast the outlook for the accretion, what would be coming in from the pre-born yield point of view and that work was done this quarter. And we have adjusted the expectations for the accruable yield to the higher end and that’s basically driving the increase.

Was there anything?

Those are estimates depending on if we get to yield, paying installment, loans, et cetera, that timing could change for us.

Was there anything specific in there, or was it just a bit more broad based just overall improvement in the economy kind of driving that or…?

Yes. I don’t think -- there is nothing specific that’s driving it. It’s more than just the expectations that we have when we did the deal and closed the transaction for Star 1, that’s gotten better in terms of the expectations. So nothing really -- nothing really to point to, just better expectations based on our detailed recasting.

Okay. Thank you very much.

Thanks, Blair. And thanks everyone for dialing in today. Again, a replay of the today’s webcast will be on the investor website at investors.bankatunion.com. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.